Speech - China and Europe: Essential Partners

European Commission

Karel De Gucht

European Commissioner for Trade

China and Europe: Essential Partners

EU Chamber of Commerce in China Event / Brussels

17 September 2013

Ladies and gentlemen,

At this time, every year, for many years the EU Chamber of Commerce in China has been coming to Brussels.

Your visit provides a chance to survey the set of connections between people, companies and governments, which is the essence of the relationship between Europe and China.

I have been pleased to discuss many changing aspects of that relationship with you - trade flows, investment stocks, a huge variety of government policies - since I've been Commissioner.

But each time we meet one fact is the same - despite all those changes: The EU-China relationship is more important than it was the previous time we met.

We all know the figures: from negligible trade contacts in the 1970s, the bilateral trade relationship has exploded to become the world's second largest - and not second by much.

Investment has tracked trade, increasing rapidly, though still lagging somewhat behind.

And both investment and trade track China's own growth into what some academics are calling the first mega-trader:

An economy whose trade is not only vital for its own growth but also for the rest of the world.

When we meet again next year, and in the years after that, I expect we will continue to say that the EU-China relationship is more important.

That is because our era of hyper-globalisation - which has seen the share of world exports to world GDP rise from 15 to 26% in 20 years - is not over yet.

The rapid growth in transport and communications technologies and the geographical expansion of the global middle class behind today's global value chains are very likely to continue.

And so - therefore - is the intensification of the China-EU economic relationship.

What policymakers need to consider then is how that fact impacts on our goal of growing our economies. How can we get the most out of this relationship?

To answer that question we both need to look at our policies at home and our policies towards each other.

In Europe the most important thing we can do at is to continue our work to recover from the crisis.

The strengthened European structures that we are building provide a stronger foundation for European companies participation in world markets:

• • 

  Stability is precondition for company planning; international success does not come over night.

• • 

  More directly, stable macroeconomics and a strong financial system means that European companies can have access to the finance they need to trade internationally. In parts of Europe this is not the case today.

At the same time, Member States' structural reforms mean the European economy will be more agile in the face of the changes that come with international economic integration:

This is because international trade helps an economy most when it is accompanied by the right labour, education and innovation policies.

As a result of the reform Europe is making progress:

Growth has returned to most of the continent and the signs are looking better for even the hardest-hit economies.

But, as President Barroso said in his State of the Union address last week: "Our job is not finished. It is in its decisive phase." We have more work to do.

In China, domestic policy changes can also help get the most out of the EU-China relationship.

This is because of one fact clear to all of us who want China's success to continue:

The growth model that has brought the country to the gates of prosperity will not be the one that takes it through them.

As the new government itself has made clear - a rebalancing of the economy in favour of domestic consumption is essential. It needs to be combined with a move towards innovation-driven, rather than finance-driven growth. And both of these depend on finding a new relationship between government and the economy.

How does this relate to the EU-China relationship? In two ways:

First, an ambitious reform programme would address many of the frictions that we have seen in recent years. From subsidisation, to innovation policy to market access. These could be addressed by a comprehensive reform agenda.

Second, and more importantly, getting to an innovation & consumption driven economy requires more exposure to the international environment. New ideas and new competition are simply essential for that to happen.

Of course, reform is a challenge and will not be completed overnight. That is one important lesson we have also learned here in Europe in the last few years.

The position paper that the EUCCC is launching underlines that reform is necessary for China to maintain growth.

It confirms that the reform process seems to have begun, but it also shows that there is still a long way to go. And that in many areas, the ability of foreign companies to do business is still restricted, including:

• • 

  Regulatory structures could be streamlined to reduce conflicts of interest, enhance transparency, and improve enforcement.

• • 

  The financial system could be brought closer to market structures, creating both a sounder basis for domestic growth and a more level playing field. This would also help rationalise the system of state owned enterprises.

• • 

  Indigenous innovation policies could also be looked at. On the one hand they can have counterproductive effects. In areas like e-vehicles for example, where China risks being de-linked from a growing international standards eco-system. On the other, they affect the ability of European firms to compete.

As I said at the outset, I raise these issues not only because they are of a concern for Europe but also because they are a concern for China.

Reform in both of our domestic economies is essential to make us fit for a strengthened trade relationship.

We also need to look at our international policies. In other words, how can we work together to strengthen our ties?

I want to highlight two projects that can help — and which feature in the EUCCC's recommendations.

The first is our plan to negotiate a bilateral investment agreement.

Foreign investment brings know-how, expertise and the competition that will boost the productivity of China's companies. Investment abroad by Chinese companies, particularly in competitive markets like ours, also helps them become more efficient and effective.

The EU-China investment relationship is already strengthening. But there is considerable room for improvement. Europe's investments in China add up to less than roughly 2% - 4% if Hong Kong is included - of our total investments abroad. By comparison, 30% of our stocks are in the United States.

China's investments in Europe, while growing, still account for less than one per cent of total foreign direct investment here. In comparison, 20% is American.

The right kind of agreement would give a boost to investment in three ways:

• • 

  European investors would have better access to the Chinese market and their Chinese counterparts would be more encouraged to invest in Europe.

• • 

  Companies operating in both Europe and China would be able to operate on a more level playing field - no matter what their origin or ownership structure.

• • 

  And investors would have a simpler legal framework to deal with. A new agreement would consolidate all of the 25 current bilateral investment treaties (with 27 of our Member States) into a single framework.

The second thing we can do together is support multilateral cooperation at the World Trade Organisation. Neither China nor Europe will be successful without the system of global trade rules. And we both have a huge stake in a new global trade liberalisation deal.

These are a crucial few months for the WTO. At Bali we will have the chance to agree on a useful package of measures - most importantly a new agreement to streamline customs procedures - but we can also make progress in areas like trade in information technology equipment. And Europe would be interested to understand better China's possible interest in services liberalisation. The opening up of services is central to structural reforms and higher living standards in China. An ambitious new Trade in Services Agreement that included China would be a boost to world trade in services.

If we succeed in Bali we will make an important contribution to the world economy - the benefits of a trade facilitation deal alone will be counted in the tens, if not hundreds of billions of euros.

We will also breathe new life into an organisation that has been challenged by the blockage in the Doha Round. That will set it back on course towards developing the rules that the European Union and China need to be a success in the world economy.

Ladies and gentlemen,

Let me conclude by saying this:

Notwithstanding frictions - and this year that have been several, much publicized in the media - the trade and investment relationship between China and Europe remains a fundamental source of mutual benefit.

As a result, it is a vital interest of both China and Europe that each of our economies is successful.

What is traditionally said about the American economy also holds for Europe and China: When we sneeze, the world catches a cold.

So we need to work together to build an economic relationship that is more than the sum of its parts. A relationship that drives growth at home and contributes to growth in the world economy at large.

As two of largest players in that economy that is not only in our interest, it is our responsibility.